Magazine

Online Extra: Centex: Raising the Roof

April 04, 2004

Timothy R. Eller is a 31-year veteran of Centex Corp. -- No. 12 on the latest BusinessWeek 50 list of America's top performers. On Apr. 1, he'll become chairman and chief executive officer of the Dallas-based company, one of the nation's largest homebuilders and nonbank retail mortgage-loan originators. Additionally, Centex (CTX) is one of the top five general contractors and the fourth-largest residential pest-management company. Plus, it provides title and insurance services.

That combination of housing services helped keep 2003 sales growing at a 25% pace, to $10.4 billion, for the 12-month period ended Feb. 29. Profits grew faster, by 55%, to $737.6 million. And it's already off to a good start this year. Centex ended its most recent quarter with orders for 14,775 homes, representing some $3.8 billion. BusinessWeek Dallas Correspondent Stephanie Anderson Forest recently spoke with Eller about what's driving Centex' performance and the outlook for the housing sector. Following are edited excerpts of their conversation:

Q: What are the key factors behind Centex' success in recent years?

A: First, Centex is in a very favorable industry. In the past decade there has been terrific growth in housing. Also, Centex is very diversified, and it has been for most of its life. But we're diversified around the core homebuilding operation. We have a pretty sophisticated financial-services operation that includes offering both conforming and nonprime loans. We have one of the largest pest-management firms in the country, and we've also had a [general] contracting business for 40 years.

Q: What's the value of that diversification?

A: Our other businesses provide both operational and financial synergies, as well as fuel the growth of Centex Homes [the homebuilding division]. The financial-services and pest-management businesses allow us to offer services that our customers want and to stay connected to our customers long after the sale of the home. And our contracting business provides about $125 million of cash float at any given time that can be used to invest in our homebuilding business.

Q: Why did the company spin off Centex Construction Products [in January, 2004] and Cavco Industries [in June, 2003]? They seemed to fit with the "core" homebuilding business. [Centex Construction Products, recently renamed Eagle Materials, manufactures and distributes cement, gypsum wallboard, recycled paperboard, and concrete. Cavco is one of the nation's largest producers of manufactured housing.]

A: They did. But growing those businesses would require a lot of capital -- capital that would be diverted from our core homebuilding operations, and we weren't willing to do that. It's about competition for capital. We've simplified the company a lot over the last year.

Q: Besides low mortgage rates, what has been driving the continued strength in housing, which we saw even during the recent economic downturn?

A: Demand, which is increasingly being influenced by demographics. Baby boomers, echo boomers [typically described as the children of baby boomers], immigrants, and children of immigrants are all fueling demand. We're in an industry with rising demand through probably the next decade to 15 years. [Industry] estimates are for 1.7 million to 1.9 million annual housing starts per year over the next 10 to 15 years.

Q: Inevitably, mortgage rates will begin to rise. Any concern that they'll slow things down at Centex?

A: No. During the last two periods of rising rates -- [the first was] 1999 to 2001 -- there were seven quarters of interest rate increases that amounted to 180 basis points. And last year, starting in July through October, there was a 120-basis-point rise in mortgage rates. In both periods, we were able to increase our business.

Q: So, more than mortgage rates affect home-buying decisions?

A: Yes. It's a lifestyle choice. It's the need to move into a house rather than into an apartment. And there's a lot of flexibility in the home buying. For example, if a buyer was looking at a $160,000 house and rates start to rise, he or she then might look at buying a $150,000 house instead.

Q: Some industries are just now beginning to get pricing power as the economy recovers. But the housing sector has had that for a while. Do you expect that to continue, or is there some validity to concerns about a bubble?

A: Yes, the industry will continue to have pricing power. The main reason is because the supply of land that's available for home construction in the U.S. remains constrained because of entitlement issues. That keeps pressure on prices. Because of the imbalance between supply and demand, we will have increasing pricing power.

Q: What's your outlook for Centex for the next few years?

A: We're expecting to grow revenues at 15% to 20% a year over the next five years and even faster growth in earnings. We believe our performance over the next five years will be as good or better than the last five years.